MERGERS

What is a MERGER?
A merger is a transaction that results in the transfer of ownership and control of a corporation.
Characteristics of a Merger:A transaction where two firms agree to integrate their operations because they have resources and capabilities that together may create stronger competitive advantage. The term merger refers to a combination of two or more companies into a single company and this combination may be either through consolidation or absorption.

Consolidation Vs Absorption
A consolidation is a combination of two or more companies into a third entirely new company formed for the purpose. The new company absorbs the assets, and possibly liabilities, of both original companies which ceases to exist. When two firms merge, stocks of both are surrendered and new stocks in the name of new company are issued. Generally , mergers take place between two companies of more or less the same size. In case of absorption one company absorbs another company i.e. it purchases either the assets or shares of that company. The merger by absorption is always friendly in nature i.e. both the companies agree to the terms of absorption.

Consolidation Vs Absorption
Example CONSOLIDATION

Y
ABSORPTION

TYPES OF MERGERS
There are four types of mergers: 1. Horizontal 2. Vertical 3. Conglomerate 4. Co generic

Business Level
AUTOS

Finished Goods
B C D E

BLUE JEANS

Raw Material
GLASS DENIM FABRIC

Business Level

HORIZONTAL Merger
A horizontal merger results in the consolidation of firms that are direct rivalsthat is, sell substitutable products within overlapping geographic markets. This form of merger results in the expansion of a firms operation in a given line product line and at the same time eliminates competitor.

Examples: Boeing-McDonnell Douglas ; Staples-office Depot(unconsummated);Chase Manhattan-Chemical Bank; Southern Pacific RR-Sante Fe RR

The merger of suppliers T and U AUTOS represent a HORIZONTA B A L MERGER

Finished Goods
C D E

BLUE JEANS

Raw Material
GLASS DENIM FABRIC

VERTCAL Mergers

When two firms working in different stages of production or distribution of the same product join together, it is called Vertical Merger. A vertical Merger is one in which the buyer expands backward and merges with the firm supplying raw material or expands forward in the direction of the ultimate consumer. The economic benefits of this type of merger stem from the firms increased control over the acquisition of raw material or the distribution of finished goods. Examples: Time Warner-TBS; Disney-ABC Capital Cities;Clevard Cliffs IronDetroit Steel;Brown Shoe-Kinney

AUTOS

Finished Goods
B C D E The merger of Suppliers F and Z represent a VERTICAL MERGER W X Y

BLUE JEANS

Raw Material
GLASS DENIM FABRIC

CONGLOMERATE Mergers
A Conglomerate merger involves two firms in totally unrelated activities. A conglomerate is a firm that has external growth through a number of mergers of companies whose business are not related either horizontally or vertically. A conglomerate may have operations in manufacturing, electronics, banking, fast food restaurants and other unrelated businesses. This form of business results in the expansion of a firms operations in different unrelated lines of business with an increased sense of operating synergies. Examples: Cardinal Healthcare-Allegiance; AOL-Time Warner; Phillip Morris-Kraft; Citicorp-Travelers Insurance ;Pepsico-Pizza Hut; Proctor & Gamble-Clorox.

AUTOS

Finished Goods
B C D E

BLUE JEANS

Merging unrelated firms represents a Raw CONGLOMERA Material TE MERGER GLASS DENIM FABRIC

Co generic Merger:

In these mergers the acquirer and target companies are related through basic technologies, production processes or markets. The acquired company represents an extension of product line, market participants or technologies of the acquiring companies. These mergers represent an outward movement by the acquiring company from its current set of business to adjoining business. The acquiring company derives benefits by exploitation of strategic resources and from entry into a related market having higher return than it enjoyed earlier. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources. Some classified co generic mergers into product extension and market extension types. When a new product line allied to or complimentary to an existing product line is added to existing product line through merger, it defined as product extension merger, Similarly market extension merger help to add a new market either through same line of business or adding an allied field . Both these types bear some common elements of horizontal, vertical and conglomerate merger. Example: merger between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a Product extension merger and merger between GMM Company Ltd. and Xpro Ltd. contains elements of both product extension and market extension merger.

A merger can take place in the following four ways:By Purchase of Asset By Purchase of Common Share By exchange of share asset

Exchange of shares for shares

By Purchase of Asset
The asset of company Y may be sold to company X. Once this is done, company Y is then legally terminated and company X survives.

By Purchase of Common shares

The common share of the company Y may be purchased by company X. When company X holds all the shares of company Y, it is dissolved.

By exchange of shares for Asset

Company X may give its shares to the shareholders of company Y for its net assets. Then company Y is terminated by its shareholders who now holds shares of company X.

Exchange of shares for shares

Company X gives its shares to the shareholders of company Y and then company Y is terminated.

Example s

1. ASIAN PAINTS-BERGER INTERNATIONAL

Year-2002

Asian acquired 50.1% controlling stake in Berger International

Deal Rs.57.6 Crores Berger International Paints India Ltd. In Calcutta(subsidiary) Objective:-Enter into the South East Asian market, growth. Such as Singapore, Thailand, Myanmar, Bahrain, Malta, UAE, Jamaica,Barbados and Trinidad and Tobago

2.AOL SELLS CALL CENTRE TO ESSAR

April 1st 2008 Aegis BPO of Essar takes over to acquire AOL call centre in White Field. It is estimated at $100 million. Payable in cash Purpose is to enhance its voice and nonvoice offerings in the technological support space.

Motives and benefits of Mergers Economies of large scale business

Motives and benefits of Mergers Desire to enjoy monopoly power

Elimination of Competition

Patent rights

Adoption of modern technology

Mergers

Desire to unified control &selfsufficiency

Lack of technical & managerial talent

Personal ambition

Effects of trade cycles

Government pressure

MOTIVES AND BENEFITS OF MERGERS

Economies of large scale business:One of the most important reasons for mergers is that a large-scale business organization enjoys both internal and external economies which generally lead to reduction in cost and increase in profits.

Elimination of Competition
This is also one of the motivating factors for mergers because it eliminates severe, intense and wasteful expenditure by different competing organizations,

Adoption of modern Technology

The adoption of modern scientific technology by a corporate organization requires large resources which may be out of an individual firm. This may induce Mergers of different firms.

Lack of technical and managerial talent:In developing countries at the earlier stages of industrialization, scarcity of entrepreneurial, managerial and technical talent is also one of the important factors that leads to mergers.

Effect of trade Cycles:Trade cycles are the periods of ups and downs in an economy. Ups are the periods of boom when production is on large scale, profits are more, employment is maximum and new firms crop up indiscriminately in all directions. This situation creates unhealthy competition and acts as a motivating factors for mergers. On the other hand, downs are the period of depression when economic activity reaches to its lowest point. During depression only efficient and large firms manage to survive and inefficient firms, to reduce the risk of failures, preferred to be merged or acquired by strong firms.

Desire to enjoy monopoly power:

Mergers leads to monopolistic control in the market. In the situation of monopoly, a firm can easily make adjustment in the supply and price of products and can also increase the profit of the firm.

Patent rights
The exclusive right to use the invention of any new machines, method or idea is one of the reasons favoring mergers. Patents have given monopoly position to many firms in the market at national and international levels.

Desire to unified control and self sufficiency

firms which depends on other units for their raw material requirements or which are engaged in different process of product for ensuring uninterrupted supply of raw materials are encouraged and benefited by mergers. By bringing such firms under unified control, their dependence on other firms can be avoided.

Personal Ambition
One of the factors favoring mergers is personal ambition of becoming the chief of a personal empire. The desire of a person to increase profits and enlarge his own industrial empire is the factor at the back o9f many mergers.

Government Pressure
Whenever the government of a country feels that the competition among firms is proving harmful to the country or it wants to improve overall efficiency of industrial undertakings, it can pressurize for mergers through legislation.

A Merger Mystery
Owners and managers of companies of sufficient size are periodically pitched merger and acquisition (M&A) deal proposals often in excess. As such, investment bankers, groups (such as private equity shops) and related companies, typically within the same industry, provide ideas to decision makers on acquiring another company, merging with a competitor or being acquired by a financial group or operating company.

Motivations for Quick Acid Tests

For companies faced with M&A opportunities, many factors need to be considered, including global impact of the arrangement, likelihood of a quick and painless negotiation process and compatibility of the merging or acquiring companies. The deal makers the front-line workers who spearhead the deals must address all of these factors (and more) in order to successfully broker M&As (and receive payment). Decision makers, prospective investors and investment banks have a few tools that provide a quick assessment of a proposed deal without spending (or wasting) too much time and energy on minutia. Thus we have certain tools to analyze the mergers.

Analysis of Mergers and Acquisitions

Various tools of Analysis are: Shareholder Value at Risk (SVAR):
SVAR is a "bet your company" index. It shows you what percentage of the acquiring company's value is at risk if the combination doesn't product any post acquisition synergy.

Premium at Risk:
This measure helps selling shareholders assess the risk that they will lose a portion of the premium they have been pledged if no synergies materialize.

Anticipating the market's initial reaction:

The value change from an M&A deal equals the present value of synergies minus the acquisition premium. You can use this formula to anticipate the market's initial reaction to an M&A deal. This tool offers far superior predictive power than the more commonly used M&A earnings accretion/dilution analysis.

Post announcement analysis:

This analysis updates the SVAR and Premium at Risk metrics after the deal is announced and the market has reacted. Such analysis enables you to judge the post announcement attractiveness of the acquirer's and the seller's shares.

CONCLUSION
A merger can happen when two companies decide to combine into one entity or when one company buys another An acquisition always involves the purchase of one company by another An M&A deal can be executed by means of a cash transaction, stock-for-stock transaction or a combination of both. The functions of synergy allow for the enhanced cost-efficiency of a new entity made from two smaller ones synergy is the logic behind mergers and acquisitions. Some may better perform with M&A, and some may not.

Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of dayto-day operations.

PRESENTED BY: Purnima Gupta (2415) Roshika (2419)